Figure 27 shows a plot of a
rank-order of stock market relative performance plotted against the
differentiated weighted score. The relative performance was
rank-ordered on a descending basis; i.e., the country with the highest relative
performance was ranked 36.

Although there does appear to be some correlation between scores and
historical performance, the data is very scattered Ė the correlation is weak.
Examination of a number of the outlying data points indicates at least two
explanations. First, the model does not adequately account for changes in the
environment. Russia scored very low but has a high relative performance. Russia
is undergoing massive changes; from not being free to political freedom, from a
command economy to a market economy, introduction of public ownership of
companies, etc. Brazil is another example. Brazil experienced many years of
runaway inflation and continual currency revaluationís. It now has a strong
economic policy in place, which seems to be arresting inflation and seems to
have stabilized the currency. It has a strong relative performance in spite of a
low score.

Second, the time periods over which the relative performance was measured
were arbitrary and probably too short. Markets become overvalued and
undervalued; the relative performance is highly sensitive to the specific
starting and ending periods chosen. Japan had a low relative performance, but it
historically has been a strong market. Singapore also had a poor relative
showing in spite of being the top scoring country. The difficulty in using a
longer period of time for this study is the short time that country mutual funds
or WEBS have existed for many of the study countries. In addition many of the
emerging markets nations have been formed or have had significant structural
changes in the last decade.

National Characteristics

The leading industrial nations of Western Europe, the United States, Canada
and Japan are leading for specific reasons:

They provide political freedom in which individuals can make decision
and take action.

They have free market economies in which market forces guide decision
making.

They have religions that encourage, or at least do not discourage, hard
work in pursuit of materialism.

They allow people who prosper through entrepreneur activities or
through hard work to keep a significant portion of their acquired wealth.

They have strong educational systems in which the entire population has
the opportunity to participate.

They have large numbers of scientists and engineers and make
significant investments in research and development.

They have a long history of industrialization.

The economies are stable so that individuals and businesses can plan
and implement projects with long-term payoffs.

There is political stability with an orderly process for changes in
political leadership.

There is low tolerance for corruption on the part of politicians, the
political bureaucracy, or business.

Unfortunately most of the industrialized countries are not living up to their
potentials. The GDP per capital growth rate is typically low indicating stagnant
or declining standards of living. The governments are pursuing social reform and
wealth redistribution at the expense of improved standard of living for those
who chose to work hard, risk assets, or to take entrepreneurial risks.

The high profit potential in emerging country investments is mostly wishful
thinking. These countries have not succeeded for a variety of reasons that are
difficult to change:

People lack the political freedom or economic freedom to make decision
to promote their well being and to act on these decisions.

The predominant religion discourages pursuit of material goals or
restricts business activities.

Legal or administrative barriers exist to entrepreneurial activities.

People are not permitted to keep a just portion of the rewards of
entrepreneurial activities or hard work.

Competitive education is lacking or is limited to a select class of
individuals.

Participation in the economic system is restricted by some measure:
class, caste, race, religion, or sex.

The currency is unstable.

The nationís wealth is lost due to military expenditures, ill-advised
infrastructure investments, wealth redistribution, or usurpation on the
part of the rulers.

The emerging market opportunities which do exist are those where one or more
of these factors are changing and the nation otherwise has some significant
advantage. Russia is changing its environment to one of political and economic
freedom. It has many natural resources and a very educated population with many
scientists and engineers. The Czech Republicís environment has changed to one
of political and economic freedom. It has a long history as a leading
industrialized nation relative to its peer group, again with an educated
population with an entrepreneurial spirit and a moderate number of scientists
and engineers. China is gradually moving towards more political and economic
freedom. It has a 3500-year written history describing a culture of
organization, education, and industriousness.

The outstanding emerging market successes, Singapore and Hong Kong, have
established environments in which entrepreneurs could work, invest and reap huge
rewards. There are few legal or administrative barriers. The rulers and
bureaucracy operate without corruption. There is economic freedom. There are no
investment restrictions on nonresidents. There are no exchange controls. Income
taxes are moderate. There are no capital gains taxes.

Opportunities for Profit

As discussed above, I feel that the emerging market country opportunities
exist where significant changes are happening and the country has significant
advantages: Russia, the Czech Republic, and China.

Brazil is an example of a country where the change is less substantial and
creates a shorter-term opportunity. The government seems to be succeeding in
bringing a long-standing inflation problem under control. This will create some
opportunities since business people will have the opportunity to borrow money
and to implement projects with a longer-term payoff. In addition the price
earnings multiple increase because investors can more reliably predict earnings
and the risk of losing capital due to currency losses is diminished. However
Brazilís potential is limited over the long term by other fundamental
shortcomings.

Multinational companies have an advantage. The ability to reduce costs by
shifting activities to those countries where costs are lowest and to take
advantage of economies of scale by marketing globally will provide a significant
advantage over companies without these advantages. These companies have the
resources to acquire and implement the latest technologies. The multinational
companies are hiring hordes of MBAís with the best and most recent training.
These multinational companies will subsume firms producing and marketing within
a single country. Those single country firms who have a significant franchise or
market share within their countries will be attractive buyout candidates for the
multinational firms.

Opportunities exist for domestic companies in countries with fast growing
standards of living, i.e. high GDP per capita growth rates. Improving standards
of living drive demand for new products. Domestic companies are in the position
to be in touch with the needs and desires of their customers and to quickly
respond to them. Growth also drives demand for improved infrastructure:
telecommunications, electricity, gas, roads, water, sewers.

Privatization of industry wherever it happens is usually an opportunity to
profit. Government owned and operated companies are usually inefficient in
marketing and production. They are run with agendas other than profit. Once a
company is privatized, the management performance is judged on the basis of
earnings and revenue. Decisions are made to eliminate the many obvious
inefficiencies.

Opportunities for Further Research

Opportunities for further research include the following:

Identifying additional indicators and indicators that more directly
relate to the factors discussed in this paper. Data would need to be
collected, analyzed, and scored.

Determining the correlation between the indicators and the equity
investment environment. The objective is to determine what are the
meaningful indicators and to take the subjectivity out of the scoring.
Additionally a better measure of the equity investment environment is
needed.

Analyze the investment environment in the context of the state of
evolution for each nation. Michael Porter

17
discusses a model by which a
country progresses through four stages of national competitive development:
factor-driven, investment-driven, innovation-driven, and wealth-driven. It
is likely that the attractiveness of the business environment will differ
for differing types of business among the four stages. Some businesses will
do well during a factor-driven stage; e.g. textiles, where others will due
well during other stages; e.g. computers during the innovation-driven stage.

Understand the dynamics surrounding currency devaluation. During the
course of writing this paper, devaluation occurred in Czech Republic,
Thailand, and Philippines currencies. Money making opportunities undoubtedly
exist for those who understand how to predict when a devaluation will occur
and what the result on equities will be. After the 1994 Mexico devaluation,
equity prices were cut in half. Immediately after the recent Thailand
devaluation, equity prices jumped.